Piercing the Corporate Veil
The corporate veil is the equivalent of a bullet-resistant vest when it comes to legal protection, acting as a barrier to protect shareholders from the liabilities of their corporation. I use the term bullet-resistant vest to differentiate from a bulletproof vest, which typically refers to a guaranteed method of preventing an action. In this case, the corporate veil will not guarantee the protection of the shareholders, but it will act as a shield until there is reason for the court to pierce the corporate veil, breaking through the shield and holding the shareholders liable.
Different states have differing grounds to pierce the corporate veil. However, there are two main requirements for a court to pierce the corporate veil, placing the burden of accumulated liabilities on the shareholders. These two requirements are the domination of a corporation by its shareholders, and the utilization of that domination for improper conduct. Other grounds to pierce the corporate veil include but are not limited to the failure to follow formalities, fraudulent activity, and failure to record meetings. If the prosecution can fulfill the burden of truth by presenting these grounds, the court may pierce the corporate veil and hold one or more of the shareholders of the corporation liable for their actions. Some actions that may lead to piercing the corporate veil include but are not limited to the use of the corporation’s assets to pay a shareholder’s personal expenses or debts; failure to separate personal and corporate identities; a shareholder accumulated bills that the company is left with unjustly.
Awareness of the possibility of a court piercing the corporate veil is vital for business owners or shareholders to be aware of as it directly relates to their own protection. Whenever signing any sort of contract, owners of the corporation must ensure that they are signing on behalf of their role in the corporation, not as an individual. Their title and the business name should be apparent to avoid the corporate veil from being pierced. Funds should not be co-mingled between shareholders’ personal assets and the business’ assets. Fiduciary duties of all officers must be maintained, and all records should be documented accurately. While these proactive duties may seem elementary, they are essential in protecting each shareholder as a bullet-resistant vest against the courts’ lethal bullet, the piercing of the corporate veil.
